Markets: A journey to the past! - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Markets: A journey to the past!

Mar 28, 2006

Are the Indian stock markets over valued? Is there any upside left? Can the phenomenal rise in the stock market over the last three years sustain? With the indices making new highs every other day, these are the questions that often cloud the minds of the investor. In this article, we shall give a historical perspective of the Indian stock market and what lies ahead?. For the purpose of the article, we have collated data for around 2,500 companies (see graphs below). If history is of relevance, the charts do indicate that we have come a long way with the market capitalisation moving into new highs. The combined market capitalisation of the 2,500 companies has grown at a CAGR of 74% in the last three years. In the same period, the CAGR in sales and net profits of these 2,500 companies was 17% and 36% respectively.

There are many reasons for the sharp rise in market capitalisation in the last three years.

  1. The corporate sector has been through a very extensive restructuring phase, which includes shedding excess employees and pruning overheads. Part of the cash flow generated from this restructuring exercise was utilised towards retiring high cost debts. The fact that interest rates declined sharply in the last ten years also helped matters.

  2. The restructuring was accompanied by economic recovery towards the early 2000, which had a positive impact on the asset utilisation factor. Consequently, with costs under control, the benefits of incremental sales accrued at the bottomline level. This is clearly reflected from the reduced gap between operating margins and net margins in the last ten years (see adjacent chart).

Going forward, while competition is expected to intensify further, interest rates seem to have bottomed out. And this is the phenomenon across the globe. All the developed nations have witnessed a sharp rise in interest rates in the last two years (though on a lower base). Though demand prospects are promising, in our view, India Inc. has entered the capital expenditure phase (like in the mid 1990s). While this is a positive in the long-term, we believe that profitability is likely to remain under pressure in the medium-term i.e. the capacity expansion is likely start contributing to growth only after two years. Meanwhile, corporates will have to bear higher depreciation and interest charges.

To conclude...
While we continue to remain positive on the 'India Story' in the long run, we do not subscribe to the view that the momentum in the Indian stock market will sustain for ever (there are pockets of insanity in valuations). At the current juncture, Indian stocks are no more 'value buys'. As Warren Buffet once said, 'Price is what you pay and value is what you get'. To that extent, we must exercise caution in our stock selection.


Equitymaster requests your view! Post a comment on "Markets: A journey to the past!". Click here!

  

More Views on News

This Smallcap is a Must Have Stock in Your Portfolio (Profit Hunter)

Sep 29, 2020

Investing in this smallcap could open doors of huge, long-lasting wealth.

Why the Market May Rally for a Few Days (Fast Profits Daily)

Sep 28, 2020

Why I think the market can rise for the next few days.

My Top Pick for 2021 is Not a Stock. It is Something Much More Powerful (Profit Hunter)

Sep 28, 2020

My top pick for 2021 is something that has helped me and my subscribers beat the stock market by a factor of 2:1.

Your Queries on the 8-Year Cycle Answered (Fast Profits Daily)

Sep 25, 2020

You've sent in your queries on my videos on the 8-year greed and fear cycle in the market. I'll answer them in this video.

It's When You Sell that Counts (Profit Hunter)

Sep 25, 2020

How I alerted readers to the impending crash last week.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Sep 29, 2020 01:13 PM

MARKET STATS